It’s crucial to first comprehend the distinctions between a S corporation and a single member LLC. In contrast to a S corporation, which is a corporation that has chosen to be taxed under Subchapter S of the Internal Revenue Code, a single member LLC is a limited liability company with just one owner.
Being taxed as a S corporation has several benefits, one of which is that it permits the business owner to pay less in self-employment taxes. This is due to the fact that S businesses must pay their owners a wage that is reasonable and subject to payroll taxes, but any surplus profits may be transferred to the owner as dividends that are not subject to self-employment taxes.
In order to make the election to be taxed as an S corporation, the single member LLC must first file Form 2553 with the IRS. Within 75 days of the start of the tax year, or at any point during the prior tax year, this form must be submitted. It is crucial to remember that in order to make this choice, the single member LLC must already be categorized as a corporation or have chosen to be regarded as one for tax reasons.
The owner of the business must receive a decent salary if they choose to be taxed as a S corporation. This means that they must receive a salary that is on par with what another employee would earn for doing similar job. The IRS may categorize dividends as salary and impose additional payroll taxes on the company if the firm owner receives an excessively low wage and the majority of their income in dividends. If I Change to a S Corp, Do I Need a New EIN?
A single member LLC does not require a new Employer Identification Number (EIN) if it chooses to be taxed as a S corporation. Even after the choice has been made, the current EIN may still be utilized for tax purposes. To avoid confusion, the single member LLC may need to obtain a new EIN if they have been using their current one for banking or other non-tax uses.
In conclusion, if certain conditions are met, a single member LLC may be taxed as a S corporation. The firm owner must be paid a reasonable remuneration and the election must be made by submitting Form 2553 to the IRS. Before making this decision, it is crucial to speak with a tax expert to make sure it is the best one for the company. Furthermore, a single member LLC that chooses to be taxed as a S corporation need not obtain a new EIN for tax purposes, but they might need to do so for other reasons.